Monthly Archives: February 2012

Corporate Governance at Silicon Valley Companies

The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies; the complete survey is available here.

As counsel to a wide range of public companies in the high technology and life science industries, primarily based in Silicon Valley and Seattle, Fenwick has collected information on the corporate governance practices of publicly traded companies in order to counsel our clients on best practices and industry norms in corporate governance. We have collected this data since 2003 and believe this unique body of information is useful for all Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally.

Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1] In this report, we present statistical information for a subset of the data we have collected over the years. These include:


Do Firms Manipulate Their Stock Prices? Causal Evidence from M&A

Editor’s Note: The following post comes to us from Kenneth Ahern and Denis Sosyura, both of the Department of Finance at the University of Michigan.

In the paper, Who Writes the News? Corporate Press Releases During Merger Negotiations, which was recently made publicly available on SSRN, we show that firms manipulate their stock prices during merger negotiations in order to affect the terms of the transaction. We argue that this strategy is made possible by the loose regulation of corporate disclosure. In particular, U.S. federal laws generally do not require firms to publicly disclose all material corporate events when they occur. Instead, firms have significant flexibility with respect to the content and timing of their press releases. We show that firms strategically exploit the flexibility afforded by the law to influence their stock prices precisely when they benefit the most from short-term manipulation.

To identify firms with incentives to manage their stock prices, we focus on stock acquisitions, a setting where a short-term change in firms’ stock prices has a long-term effect on merger outcomes. If an acquirer in a stock acquisition can temporarily raise its stock price during a short time window when the stock exchange ratio is determined (usually several weeks), it can issue fewer of its shares for each target share and reduce the true cost of the takeover. To establish causal evidence of price manipulation, we exploit the difference in the time period when the terms of the merger are determined in fixed-exchange ratio vs. floating-exchange ratio stock acquisitions. These two groups of transactions are very similar along firm and deal characteristics, but have a clear dichotomy in the timing of media management incentives.


Morrison’s Impact on Institutional Investors

The following post comes to us from Jeffrey P. Mahoney, General Counsel at the Council of Institutional Investors, and is based on the executive summary of a CII white paper prepared by Christian J. Ward and J. Campbell Barker, available in full here.

American securities law is at an important crossroads, and the direction it takes will affect investors well into the future. For decades, federal securities law protected U.S. domiciled and citizen investors against fraud affecting the securities they purchased, even if purchased on foreign markets. Under the longstanding conduct and effects tests, the antifraud provisions of U.S. securities law covered all conduct that injured American investors. Fraudsters could not escape a private right of action for securities fraud by consummating a transaction abroad.

The U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank [1] changed the landscape for U.S. investors. In Morrison—a dispute about the territorial reach of the antifraud provisions of U.S. securities law—the Supreme Court rejected four decades of federal court jurisprudence applying the conduct and effects tests and adopted a new rule that focuses narrowly on the location where securities were purchased and sold. Under prior law, if the fraud involved conduct in the United States or had an effect in the United States, victims had a private right to bring suit. Under Morrison’s new test, so long as the fraud relates to securities that trade only on foreign exchanges or other foreign platforms, no amount of harm to American investors triggers the antifraud protection of U.S. securities law, even if investors submitted their orders from the United States.


Post-Crisis Trends in U.S. Executive Pay

Carol Bowie is an Executive Director of MSCI and head of compensation policy development at ISS. This post is based on an ISS white paper by Subodh Mishra, available in full here.

Though the global financial crisis of 2008 prompted a seismic shift in attitudes toward executive pay on the part of lawmakers, the public, investors, and other stakeholders, average compensation levels continue to rise or have returned to where they were before the crisis.

Mindful of the outcry over particular elements of pay packages, companies began scaling back bonus awards as well as payments related to “golden parachutes” and other forms of exit pay following the crisis.

Indeed, such components of executives’ total annual compensation declined in fiscal 2009 with some elements, including those dealing with exit pay, continuing to decline modestly into fiscal 2010.

But that has been more than offset through increases in other pay elements, most notably awards tied to company stock. The result is a 37 percent surge in total annual compensation paid to C-suite officers from fiscal 2008 to 2010 with stock awards now constituting more than half of the total pay pie.

As such, this post explores how the executive pay package mix and overall total annual compensation levels have changed since fiscal 2008 and the role played by stock-based awards in fueling the spike in total executive pay.


Investing for the Long Run

Editor’s Note: The following post comes to us from Andrew Ang, Ann F. Kaplan Professor of Business at Columbia Business School, and Knut Kjaer, former founding CEO of the Norwegian sovereign wealth fund.

Long-horizon investors have an edge. Sadly, they too often squander their advantages. That is often caused by shortcomings in their own governance structure and lack of alignment with their delegated managers. We discuss these issues in our paper, Investing for the Long Run, which was recently made publicly available on SSRN.

Long-horizon investors have the ability to reap risk premiums that are noisy in the short run and only manifest over the long run. They can acquire distressed assets when investors with over-stretched risk capacity have to sell. They can also pursue opportunities to invest in illiquid assets. The paper describes two pitfalls that hinder long-horizon investors in fully exploiting their advantage: procyclical investing and misalignment between asset owners and managers. These are intertwined. Counter-cyclical investing requires strong governance structures to withstand the temptations of selling in blind panics when asset prices drop. Agency conflicts contribute to procyclical investment behavior.


Examining the Largest Golden Parachutes

The following post comes to us from Paul Hodgson, Senior Research Associate at GovernanceMetrics International, and is based on a GMI report by Mr. Hodgson and Greg Ruel. The full report, including detailed information about the severance packages discussed below, is available here. Work from the Program on Corporate Governance about golden parachutes includes Golden Parachutes and the Wealth of Shareholders by Bebchuk, Cohen, and Wang.

After Jack Welch retired from General Electric it wasn’t until a divorce settlement forced the disclosure of his retirement benefits package that anyone took any notice. At that time, the scandal surrounding Mr. Welch was that his perquisites were valued at $2.5 million a year, and included luxuries such as the use of an $80,000-per-month Manhattan apartment owned by the company, court-side seats to the New York Knicks and U.S. Open, seating at Wimbledon, box seats at Red Sox and Yankees baseball games, country club fees, security services and restaurant bills. No one at the time of his departure had valued Mr. Welch’s full retirement package either, which – at almost $420 million – dwarfs the perks package that Mr. Welch ultimately relinquished.

Since then, multi-million dollar severance and other separation packages, commonly referred to as “walk-away” packages, have become so commonplace for CEOs that when HP fired Leo Apotheker with a $12 million guaranteed cash payment it barely registered. Accelerated equity awards along with substantial pensions and other deferred compensation all but guarantee significant payouts at many of America’s largest corporations in every termination situation except for a termination “for cause.” This report goes back to 2000 to examine the largest golden parachutes and other termination packages of the past decade, many of which have never been quantified before.


SEC Dismissal of “Failure to Supervise” Proceeding

Giovanni Prezioso is a partner focusing on securities and corporate law matters at Cleary Gottlieb Steen & Hamilton LLP, and former General Counsel of the Securities and Exchange Commission. This post is based on a Cleary Gottlieb memorandum.

In a significant case for legal and compliance professionals at securities firms, the Securities and Exchange Commission (the “Commission”) recently dismissed enforcement proceedings against Theodore W. Urban, former General Counsel of Ferris, Baker Watts, Inc. (“FBW”). [1] The dismissal of the proceedings, by an evenly divided Commission, rendered “of no effect” a prior administrative law judge decision that had raised widespread industry concerns because of its broad construction of the circumstances in which a legal or compliance professional could be deemed a “supervisor.” [2]

The Division of Enforcement, in proceedings commenced in 2009, alleged that Mr. Urban (i) had been the supervisor of an FBW employee, Stephen Glantz, who allegedly engaged in violations of the securities laws, and (ii) had “failed reasonably to supervise” Mr. Glantz under both Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 203(f) of the Investment Advisers Act of 1940 (the “Advisers Act”). [3] The Commission’s chief administrative law judge determined, in her Initial Decision in the matter, that Mr. Urban should be viewed as Mr. Glantz’s “supervisor,” even though Mr. Glantz was not a member of any department reporting to Mr. Urban, but she dismissed the Division’s petition on the grounds that Mr. Urban had reasonably discharged his duties as a supervisor. [4]


Registration of Investment Advisory Affiliates

Paul N. Roth is a founding partner of Schulte Roth & Zabel LLP and chair of the firm’s Investment Management Group. This post is based on a Schulte Roth & Zabel Client Alert by Mr. Roth, Marc E. Elovitz, and Brad L. Caswell.

On Jan, 18, 2012, the SEC’s Division of Investment Management issued a no-action letter [1] permitting registered advisers to private funds (“filing advisers”) to include general partners and similar SPVs of their affiliated funds on the filing adviser’s Form ADV. In addition, U.S. filing advisers who have affiliated investment advisory firms which are controlled by, or under common control with, the filing adviser, may include such affiliates (“relying advisers”) on their Form ADV, when they are considered part of a single advisory business. The staff set forth certain circumstances where a single advisory business would exist, absent facts suggesting otherwise. This Alert focuses on the practical implications for our clients of the Staff’s no-action letter.

Fund General Partners, Managing Members and Similar SPVs

Fund general partners, managing members and other similar SPVs generally do not need to separately register provided that the SPV, its employees and persons acting on its behalf are subject to supervision and control by the registered adviser, and therefore are “persons associated with” the registered adviser. This position applies to registered advisers with single or multiple SPVs. An SPV with independent directors may also rely on this position provided that those independent directors are the only persons acting on the SPV’s behalf that the registered adviser does not supervise and control.


It Pays to Follow the Leader

The following post comes to us from Amy Dittmar and Di Li of the Department of Finance at the University of Michigan, and Amrita Nain of the Department of Finance at the University of Iowa.

Financial bidders like private equity firms often compete with corporate bidders for the same target. Over the last 27 years, financial sponsors made 23 percent of all competing bids. In our paper, It Pays to Follow the Leader: Acquiring Targets Picked by Private Equity, forthcoming in the Journal of Financial and Quantitative Analysis, we examine how the presence of financial sponsor competition affects corporate buyers. Financial bidders are considered experts in the business of identifying undervalued targets. Gains from acquiring an undervalued firm pursued by private equity may accrue to any winning bidder that pays a similar premium for the target. Moreover, existing research shows that financial bidders have lower average valuations than strategic bidders. Thus, a corporate acquirer competing with a financial bidder (which is typically private) may win the auction at a lower premium than when it competes with another public corporate firm.

We find that corporate acquirers who purchase targets that are sought after by financial buyers outperform corporate acquirers who buy targets bid on by corporate firms only or those without competition. These results are robust to alternative measures of acquirer performance and different performance windows. A battery of tests shows that deal characteristics, acquirer abilities, and observable target characteristics cannot explain this difference in returns.


Transforming Executive Pay in the UK

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert by Selina S. Sagayam, James A. Cox, and Leila Greer-Stapleton. Work from the Program on Corporate Governance about executive compensation includes the book Pay without Performance and the article Paying for Long-Term Performance, both by Bebchuk and Fried.

The Business Secretary of the British government (“Government”), Vince Cable, recently announced a package of controversial plans in a bid to transform UK executive pay culture [1]. Under a new-four-pronged approach, shareholders would for the first time be given a binding vote on executive pay packages. Executive boards may also need to become more diverse — including at least two individuals that had not previously been on a board of directors, and people from a broader range of professional backgrounds.

The Government is to finalize the detail of these plans soon. Mr. Cable was careful to admit that “no proposal on its own is a magic bullet”. There is however real concern that in the quest for the perfect alignment between pay and performance, the seemingly scatter gun approach taken by the coalition government has failed to hit the mark. This alert provides an overview of the proposals, and looks at some of the questions and concerns that they have raised.


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